Shared ownership of renewable energy developments - good practice principles: consultation

5. Structure of Investment

This section sets out:

• Negotiating commercial terms
• Commercial models

5.1 Commerciality

Including an element of shared ownership in a renewable energy project should not reduce the economic viability of the overall project.

Flexibility of approach and open communication are key to ensure that the shared ownership structure works to support the aims of both the renewable energy business and the community.

This guidance is not intended to provide project-specific solutions, but rather to provide support for starting local level discussions.

Community organisations should seek early discussions with Local Energy Scotland or other relevant organisation, to help them take forward their involvement in the shared ownership opportunity.

Professional commercial advice sought at the appropriate time will also be vital in helping assess whether the investment make commercial sense. However, communities should not expect to be given full commercial information from the outset as the renewable energy business may not be able to forecast the potential rate of return until late in the process, often after a planning application has been determined.

5.2 Negotiating the commercial terms of the Shared Ownership Investment

As well as considering the commercial models available to structure a shared ownership offer, a key first step is to consider the terms and conditions of the offer being made.

These will help the community group assess the opportunity at an early stage in the absence of detailed financial information. Some of the considerations include:

• Timing of investment
• Clear guidance on the methodology for the valuation of the community offer.

Good examples of offers by the renewables industry include:

• Community has bought in at cost i.e. paying their proportion of the development and construction costs.
• Allowing the community to buy in later in the development phase i.e. at commissioning stage to allow more time to raise funds and reduce construction risk for purpose of a community raising finance.

In recognition of the potential additional risk to the costs that a community borrowing may be subject to, there have been examples where renewable energy businesses have offered to de-risk the costs by offering:

• A minimum rate of return for the community to de-risk the investment.
• The option to capitalise any community benefit payments toward investment should the community wish to do so.

It is important for all parties to build up a level of trust. With shared ownership projects issues can arise regarding sharing confidential financial information. In some cases, and for good reasons, a renewable energy business may be reluctant to share financial information with communities and their advisors. To help overcome confidential issues, Local Energy Scotland has developed a non-disclosure agreement template (NDAs) for use between both parties. This template is available from Local Energy Scotland on request. It may be, however, that the renewable energy business prefers their own NDA arrangements which is also an option.

5.3 Commercial Models

Listed below are some of the common commercial models available to communities and renewable energy businesses. Different models may suit different communities and developments - therefore, the list is not exhaustive. It's important that options are flexible, and site-specific arrangements are encouraged.

The key point for communities is whether a proposal, irrespective of the investment structure, makes commercial sense.

The 3 most commonly used commercial models options are:

(1) Joint Venture Mode

A joint venture vehicle can be set up, which will be part owned by both community group and the renewable energy business. This may be referred to as a Special Purpose Vehicle (SPV). The community group may have the right to vote on the company's activities.

This does not necessarily mean a 50/50 arrangement. In most cases, the community will be a minority shareholding - for example, having a 10% shareholding or potentially less in a larger scheme.

(2) Shared Revenue Model

The renewable energy business owns the development (and may set up a new private company for this purpose), with the community buying the right to a defined percentage of revenues or net revenues (after operating costs and other costs have been paid). The community does not own any shares, so is not able to vote on the company's activities.

(3) Split Ownership Model

The development is split into two and is owned discretely by the renewable energy business and the community group.

No single model is preferred by Scottish Government. An open discussion of the various available possibilities, challenges and benefits is strongly encouraged.

5.4 Changing ownership of the project

There are a number of scenarios that may arise involving a change of ownership, which might present a further opportunity for a community to "buy-in" to a project or might involve a community "selling on" its share. Below are two examples:

• The renewable energy business builds a project and subsequently sells the entire development to a community.
• The renewable energy business sells its share of an existing project, where a community has a shared ownership investment.

The terms offered by the renewable energy business may differ, depending on the stage at which money is required and the value of the project as it progresses through the different stages to completion. It is important that communities have sought the appropriate commercial advice and can be confident that, whatever the structure and terms agreed upon, the opportunity will be viable and provide a return on any investment made.

In some cases, in addition to commercial advice, a community group may also wish to appoint a technical advisor to scrutinise an offer and conduct due diligence on the development and the assumptions on development output.

In the case where a renewable energy business sells its share, the community should seek to ensure that all legal agreements put in place from the outset include details on:

• How a future sale will be dealt with.
• How they will be informed of such events.
• The level of influence they will have over their share.

In summary, it is important for communities to ensure that these arrangements are included as part of the initial agreement.

Local Energy Scotland support is available to community groups to assess possible options. Advice regarding access to finance and financial support in the form of commercial loans may also available through the Energy Investment Fund (EIF).

Guidance and resources have been developed to support these discussions. (https://www.localenergy.scot/sharedownership)